Greener Ideas Changing Lives

Navigation

Tag Archives: FDI

Post navigation

In the season of elections animal spirits rule. India’s equity markets have been ebullient for some time now. Spurred by a robust inflow of foreign investment capital, markets have reacted favourably. A lot now depends on the ability of the next government to enact meaningful structural reforms, especially in a sector such as agriculture that requires modernization. Will things turn out as expected?

Reforms in agriculture are important for more than one reason. Apart from the huge number of people it employs, fortunes of the retail sector depends on what happens in farms. Infact, FDI in retail and modernization of agriculture are two faces of the same coin.

As far as the economic implications of retail FDI go, attention has been focused exclusively on its impact on the livelihood of local retailers, who are likely to take a hit on competition from the likes of Wal-Martand Tesco. The ability of local retailers to organize into an effective lobby voicing their concerns could perhaps explain this. The actual implications of retail FDI, however, are likely to extend well beyond the narrow confines the debate has been limited to.

Indian farmers are likely to be the biggest beneficiaries of a competitive retail sector, given the imbalances in the agricultural produce market. Restrictions imposed by the Agricultural Produce and Marketing Committee (APMC) Act have effectively barred them from selling their produce at remunerative prices, restricted the size of their potential market, and, most importantly, prevented competitive bidding for the produce.

Currently, the agricultural supply chain is monopolized by powerful middlemen and politically influential local groups who control mandis or wholesale markets—resulting in a huge wholesale-retail price gap. There could be little doubt that allowing FDI in retail, when complemented by scrapping the APMC Act to open up the market for wholesale procurement, will help farmers command better prices for their produce. It is likely to lead to better farming returns, increased production and lower prices for customers.

Insufficient investment in cold storage and other supply chain facilities is another major worry, but something that has been ignored for long. A study by the Associated Chambers of Commerce and Industry of India (Assocham) and Yes Bank points to the enormous shortage of warehousing capacity in India, estimated at around 35 million tonnes. The food grain wastage owing to the shortage is estimated at around 20% to 30% of the total harvest.

The reasons are not hard to find. India’s agricultural storage infrastructure was created at a time when food grains such as rice and wheat formed a disproportionate part of food consumption. It was assumed that dietary habits would remain constant for the foreseeable future. It made sense when rural incomes did not rise significantly. Even in urban areas, where food consumption was more diversified, demand for food grains remained high.

That pattern has changed dramatically in the last decade. With rising urban and rural incomes, food consumption has diversified greatly. Milk, eggs and other protein-rich diets are now a significant part of the food basket. A great part of food inflation is protein inflation, as the demand for these foodstuffs greatly outstrips supply.

Changing this requires fixing the broken supply lines with agricultural markets. For example, transporting milk to cities does not require food storage facilities but chilling plants and fleets of trucks equipped with cooling units. These investments need FDI in agricultural markets that cannot be made by governments not only due to financial constraints but also due to lack of expertise.

Given the gains that farmers and—more importantly—consumers could potentially reap, reforms aimed at strengthening the agricultural supply chain will obviously be welcome. However, reforms uprooting today’s deeply entrenched special interests will be hard to come by unless the political weight of farmers and consumers is combined for better results.

Shares in India’s Trent surged 8 percent in opening trade after retail giant Tesco said on Tuesday it had applied to buy a 50 percent stake in the company’s unit, Trent Hypermarket Ltd.

The world’s third-largest retailer, which already has a franchise agreement to provide support to Trent’s Star Bazaar chain, has made an application to India’s Foreign Investment Promotion Board and plans to invest $110 million ( Rs 680 crore). Under rules framed in September last year when the UPA government decided to allow FDI in multi-brand retail, foreign investors were required to invest at least $100 million in the retailing venture.

Trent Hypermarket runs a discount hypermarket format under the brand name Star Bazaar. Currently there are 15 Star Bazaar stores in the country: three in Mumbai, four in Bangalore, two in Ahmedabad and Pune, one each in Aurangabad, Surat, Chennai and Kolhapur.

For Tesco, the deal is an extension of existing relation with Tatas in the retail sector. It is already a wholesale supplier of merchandise to Star Bazaar. Welcoming Tesco’s India plans, Commerce Minister Anand Sharma said Tesco’s India investment will help transform India’s retail sector.

“A marquee name like Tesco would mean an endorsement for destination India,” Arvind Singhal, chairman of retail consultancy Technopak Advisors, was quoted as saying by the Business Standard.

Here is all you need to know about the deal:

1. Tesco will become the first foreign chain to invest in supermarkets in India since FDI was allowed in the retail space last year. It would even steal a march over global rival Walmart which split up with Bharti Enterprises two months ago.

2.The retailer has applied to India’s Foreign Investment Promotion Board for permission for an initial $110 million investment in the Tata Group’s retail business Trent Hypermarket Limited.Tesco has proposed an equal joint venture with its existing partner, Trent, a Tata group company, to open stores initially in Maharashtra and Karnataka. So basically, the proposed partnership will operate and build on the existing portfolio of Star Bazaar stores in Maharashtra and Karnataka only, as the other two states where Star Bazzar is present— Gujarat and Tamil Nadu— have banned foreign investment in retail.

3. The UK-based retailer will trade in products under 14 categories, including cereals, tea, coffee, spices, flour, vegetables and fruits, meat, fish and poultry, sweetmeat, bakery and dairy products, soft drinks, ice-creams, wine and liquor, textiles, footwear, crockery, furniture and electronic equipment among others and plans to open three to five stores every financial year.

4. The current market capitalisation of Trent stands at Rs 3,825.28 crore. The company has reported standalone sales of Rs 280.14 crore and a net profit of Rs 15.6 crore for the quarter ended September 2013. Currently Trent Hypermarket has a franchise and a wholesale supply arrangement with Tesco and its wholly-owned Indian subsidiary, Tesco Hindustan Wholesaling Pvt Limited, respectively. The exclusive franchise agreement grants Star Bazaar access to Tesco’s retail expertise and technical capability. Trent at present operates Westside, a fast growing chain of retail stores. The company has 74 Westside departmental stores.

5. Trent vice-chairman Noel Tata said: “The application is a positive step forward in the relationship between the Tata group and Tesco. We believe that our understanding of the Indian market coupled with Tesco’s unparalleled global retail expertise will allow us to leverage the tremendous potential of the market to the benefit of all stakeholders.”

6.Tesco has stores in countries such as China, South Korea, Thailand, Malaysia, Poland, Hungary, Ireland, Slovakia, Czech Republic and Turkey. Tesco was formed in 1919 by a Polish emigrant Jack Cohen who started selling groceries from a stall in Hackney in London’s East End.

7. In September last year, the government had allowed 51 percent FDI in the sector with certain riders like mandatory sourcing from Indian SMEs and investment in back-end infrastructure. Due to the conditions, global retailers, including US-based Walmart and Tesco had refrained from sending formal proposals to the government. Following its meetings with both domestic and international retailers, the government in August 2013 eased the norms to make the segment lucrative for retailers.

The Congress is hell-bent on pushing through its proposal for foreign direct investment (FDI) in retail. It says the move would create jobs and curb inflation besides creating infrastructure which the agriculture sector lacks. However, the bigger motive is to fight the overwhelming perception that the government is caught in a policy paralysis and is unable to take decisions.

The entire opposition is against the move. The argument here is entry of big global players such as Walmart, Carrefour and Cesco in the retail sector would jeopardise the livelihood of millions of small retail traders and more than four million people would be jobless. Besides, the fledgling domestic organised sector would take a hit since global players, loaded with money, are known to resort to unfair practices to kill competition.

The government’s argument that it’s a policy decision and the states are free not to allow foreign players to open shop — as laws relating to opening shops and buying grain from farmers are under the purview of the states — has not cut ice with the opponents. The BJP wants a complete rollback. The Left wants it that way too. UPA ally Trinamool Congress and the DMK are opposed to the move. And there are dissenting voices within the Congress as well.

All parties want a discussion on the issue. But here technicalities kick in. BJP, which has moved an adjournment motion on the issue, wants the discussion to be followed by voting. With even allies opposed to the FDI proposal, the Congress can ill-afford a voting. With numbers not on its side it could end up on the losing side. It’s almost a vote of no-confidence.

No side would climb down. The result: No business in Parliament for seven days.

CPI’s Gurudas Dasgupta said, “The matter should be reconsidered by the government. They have to withdraw the FDI decision and then we will discuss.”

“We want a discussion in Parliament on our adjournment motion on FDI in retail. Why is government running away from a discussion followed by a vote in the House?” said leader of Opposition in Lok Sabha, Sushma Swaraj.

“The resolution submitted for adjournment motion is non-negotiable. The government should either withdraw FDI in retail or agree to an adjournment motion to discuss the matter,” senior BJP leader SS Ahluwalia said.

Of course, the government cannot allow that. It cannot afford to be seen ruling without any moral authority. It has the option to back out for now and take up the issue later. But it would amount to loss of face. Moreover, there is no guarantee that the other important and equally contentious bills would not face similar resistance when they come for discussion.

Finance Minister Pranab Mukherjee and Prime Minister Manmohan Singh are not keen on going slow. On Tuesday, Singh, speaking at the Youth Congress convention, put up a stout defence for reform in the retail sector.

“…We have not taken this decision in any haste but after a lot of consideration. It is our firm conviction that the decision will benefit our country… It will get us modern technology, not let crops get damaged, get farmers good prices and bridge gaps,” he said, hinting that he is ready to fight it out. That Congress chief Sonia Gandhi has not intervened in the matter so far is clear indication that the party is keen on fighting it out. Efforts are afoot already to bring in the numbers.

The DMK, though opposed to the government’s proposal, has already announced that it would back the UPA if there’s a voting on the issue. If the Congress manages to convince the Trinamool Congress to shed its hard line position, it could risk a voting. Getting Congress members opposed to the bill would not be a big problem for the party.

The government could dilute its present proposal with retailer-friendly changes to allay fears in the political class as an option. It might increase the limit for procurement of goods from small and medium enterprises by big retailers from the present 30 percent to 40 percent.

However, it is more of a battle for the numbers now than for the retail sector.

Ethiopia, a landlocked country located in the horn of Africa, is readying over 3 million hectare of land for investors to develop large-scale commercial farms, according to a government official.

“We have developed 3.6 million hectare from the National Land Bank to attract foreign direct investments. Of this, we have already allotted 400,000 hectare, with 70 per cent being to Indian investors. The remaining three million-odd hectare is now available for local and foreign investors,” said Esayas Kebede, director, ministry of agriculture and rural development, Ethiopia.

He was speaking to Business Standard at the India-Africa Business Partnership Summit, a two-day event focused on bilateral trade between the two countries organised by the Federation of Indian Chambers of Commerce and Industry (FICCI) here recently.

Ethiopia, which has privatised cultivation of cotton, palm oil, rubber and sugarcane, the identified investment priority areas, had so far seen investments to the tune of $6 billion from India. Over 9,200 investors had received licences for developing large-scale commercial farms in Ethiopia since 1996, out of which around 1,300 are foreign.

“There are also huge investment opportunities in the areas of agro processing, horticulture and floriculture, dairy, meat and leather products. The leasing rates are rational. What we are looking for is rich investors from India, China and other countries, who can contribute to the social development of Ethiopia and help reduce food insecurity,” Kebede said.

The leasing period depends on the crop. For annual crops, the lease period would be up to 20-25 years, while it would be up to 35-40 years for perennial crops, with the minimum investment to take land on lease being $100,000, he added.

Kebede said that the Ethiopian government had a clear policy, specially on the incentives side. Investors are facilitated with a seven-year tax holiday. They are also allowed to repatriate 100 per cent of their earnings to any country out of Ethiopia.

Brushing aside reports on forcible relocation of locals and poor wages to those working on the new farmlands, he said, “We are expanding large-scale farming only in areas where we have sufficient arable land without depriving local farmers of their livelihood. Around 3 million people here are expected to require foreign food assistance this year. We expect our commercial farming initiatives to solve this food shortage.”

The supporters of liberalisation often argue that if the modern food retail sector is allowed a full round of
liberalisation, it may have various positive outcomes, including a reduction in prices. This article raises a
counter question, what if the markets, as it happens in several instances, fail to deliver on account of the
structural snags that may continue to persist in a rapidly growing and yet highly segmented economy.
To read more on it http://epw.in/epw/uploads/articles/16422.pdf
Retrieved from http://epw.in/epw/uploads/articles/16422.pdf on 14 August, 2011